Question

Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent..

Answer 1

Idol Staff, Poker-R-Us, Rail Haul.

Step-by-step explanation:

To rank the three stocks according to their level of total risk, highest to lowest.

We shall use the co-efficient of variation (COV) to measure the risk level of the three stocks.

`COV=\frac{\text{Standard deviation}}{\text{Average return(mean)}}`

a. Co-efficient of variation of Rail Haul :

Average return = 12% and Standard deviation = 25%

=
`(25)/(12)`

= 2.08

Hence COV of Rail Haul is 2.08

b. compute the co-efficient of variation of Idol Staff :

Average return = 15% and Standard deviation = 35%

=
`(35)/(15)`

= 2.33

Hence COV of Idol Staff is 2.33

c. compute the co-efficient of variation of Poker-R-Us :

Average return = 9% and Standard deviation = 20%

=
`(20)/(9)`

= 2.22

Hence COV of Poker-R-Us is 2.22

Ranking of stocks based on highest to lowest risk level is :

Idol Staff (2.33), Poker-R-Us (2.22), Rail Haul (2.08).